The Reserve Bank of India (RBI) has lowered its policy rate by 25 basis points to 5.25%. This move aims to boost economic growth while inflation remains manageable. As a result, the USD/INR exchange rate has stayed close to its record high, as markets expect possible rate hikes in the next two years. After the RBI’s decision, USD/INR reached 90.0000, just below the previous record of 90.4248. The RBI’s monetary policy committee supported the cut, stating that the positive inflation outlook allows for growth encouragement. Analysts believe the policy rate may have reached its lowest point, with future increases likely in the coming years. The swaps curve points to potential rate hikes ahead, but the RBI might also choose to ease further, which could weaken the INR. Core inflation in India, excluding gold, is near the lower end of the RBI’s 2%-6% target range. Tariff issues could also hinder growth in the next few quarters. With the RBI lowering the policy rate to 5.25%, the Indian Rupee is under heavy pressure. The USD/INR exchange rate is challenging its all-time high of 90.4248, a level not seen until this week. Traders should expect INR weakness in the short term, as the central bank prioritizes growth over the currency’s strength. Given the chance of another rate cut by the RBI, buying USD/INR call options with a January 2026 expiry could be a smart choice. This strategy allows for potential profits if the rate rises above 90.5000 while limiting losses to the premium paid. Implied volatility has increased since the announcement, making options valuable for managing the uncertain outlook. This decision by the central bank is backed by recent data showing India’s core inflation for November 2025 at just 2.9%, close to the bottom of the RBI’s target range. This low inflation, along with Q3 2025 GDP growth slowing to 4.8%, gives the RBI room for further easing. This economic backdrop suggests that any strength in the Rupee may only be temporary. We should also note the strength of the US dollar, which is worsening the Rupee’s position. The latest US jobs report for November 2025 was surprisingly strong, indicating that the Federal Reserve will maintain its current policy, contrasting with the RBI’s easing approach. This difference in policies supports a higher USD/INR exchange rate. This situation is similar to the aggressive easing seen in 2019 when the RBI cut rates repeatedly to help a weakening economy. While the swaps market anticipates rate hikes over the next two years, the immediate risk for the Rupee leans downward. Selling out-of-the-money USD/INR puts is another strategy to consider, allowing traders to collect premium based on the belief that the pair has a strong support level near current rates.

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